A contractor entered into three simultaneous contracts for highway resurfacing that each required completion within 40 days and called for liquidated damages of $400 per day. The three contracts...

  1. A contractor entered into three simultaneous contracts for highway resurfacing that each required completion within 40 days and called for liquidated damages of $400 per day. The three contracts ranged from a contract price of $37,957; to $126,987 and $251,696 The contractor finished two of the contracts behind schedule.  A county department had withheld a total of $32,400 in liquidated damages.  The contractor filed suit to recover the withheld money, alleging that the imposition of liquidated damages as described above was punitive in nature and thus unenforceable.  Discuss how this case will be decided and what factor you would take into account in reaching a decision.  If the job had been finished early, would the contractor be entitled to a bonus payment for each day of early completion?
Expert Answers
Stephen Holliday eNotes educator| Certified Educator

Most states have adopted similar interpretations of liquidated damages clauses in contracts, but without knowing the jurisdiction, I am answering this question based on the most common laws governing contracts with liquidated damages clauses.

Assuming the contractor entered into the contract, with the liquidated damages clause, without demonstrable coercion on the part of the county, the liquidated damages clause is enforceable against the contractor if the contractor has failed to complete its work on the dates specified in the contracts:

these provisions are enforceable when the actual damages resulting from a delay cannot be easily determined at the time of entering into the contract and the amount assigned as “liquidated damages” represents a reasonable estimate of the damages which may be incurred as opposed to that which would be deemed a penalty. (http://www.dsvlaw.com/images/publications/Liquidated%20Damages%20Clauses.pdf)

The crucial issue in a liquidated damages issue is whether the liquidated damages agreed to represents a "reasonable estimate of the damages."  A court would assume that if the contractor agreed to the liquidated damages amount then the amount was reasonable--otherwise, why would the contractor agree to the amount? (See Better Food Markets, Inc. v. American Dist. Tel. Co., 40 Cal. 2d 179, 253 P.2d 10 (1953); Priebe & Sons v. United States, 332 U.S. 407 (1947); United States v. Bethlehem Steel Co., 205 U.S. 105 (1907))

If the contractor believes the liquidated damages clause has been invoked as a punishment, the contractor would have a heavy burden to prove that the liquidated damages clause was invoked with a malicious intent.  Put in another way, if the liquidated damages clause is invoked according to its terms--that is, exactly as it is written in the contract--there can be no argument about why the liquidated damages clause is invoked: the contractor fails to meet its obligations under the contract, and therefore the county invokes its rights under the contract that both parties agreed to.  Under common contract law, if both parties sign a contract, that is prima facie evidence that the contract, and all its provisions, is agreeable to both parties.

As to your last question--whether the contractor would be entitled to a bonus if it finished its work early--that circumstance, just like the liquidated damages clause for finishing late, would be spelled out in a separate clause as part of the contract.  In the scenario you have presented, however, that provision would not be relevant because there is no indication that the contractor finished a contract ahead of schedule.  If there were such a clause, however, and the contractor was entitled to a bonus for finishing early,  the contractor could offset the liquidated damages with the bonus for finishing one contract early.